Role of Digital Music Underpins Senate Hearings on Universal-EMI Deal

June 22, 2012 at 1:29 pm Leave a comment

Source: NYTimes

The chief executives of Universal Music Group, Lucian Grainge, and EMI, Roger Faxon, were among those testifying before the Senate on Thursday.Alex Wong/Getty ImagesThe chief executives of Universal Music Group, Lucian Grainge, and EMI, Roger Faxon, were among those testifying before the Senate on Thursday.

6:05 p.m. | Updated The Internet has changed almost everything about the music business, of course, from introducing a vast piracy threat to opening up avenues of distribution that allow musicians everywhere to instantly make their work available online. But when it comes to the big record companies, could the digital revolution actually have made the strong even stronger?

That thorny question was among those being wrangled over at a Senate subcommittee hearing Thursday afternoon that featured some of the most powerful executives in music. The topic was the impact of Universal Music Group’s $1.9 billion bid for EMI’s record labels, a deal that would take the beleaguered music industry to a new level of consolidation, going from four major labels to three. (Fifteen years ago, there were six.)

“Market power is why they’re doing this,” Martin Mills, the founder of Beggars Group, said at the hearing before the Senate Judiciary subcommittee on antitrust, competition policy and consumer rights. “The power to dominate Internet services and impose their demands upon them, the power to leverage a disproportionately onerous deal, the power to squeeze out the competition.”

In addition to Mr. Mills, whose acts include the superstar Adele, there also were Edgar M. Bronfman Jr. of the Warner Music Group and Gigi B. Sohn of the consumer advocacy group Public Knowledge to speak against the merger at the hearings, which were chaired by Senator Herb Kohl, Democrat of Wisconsin.

Testifying in favor were Lucian Grainge of Universal; Roger Faxon of EMI; and Irving Azoff of Live Nation Entertainment. They argued that the Internet has weakened the record companies, thus making another step toward consolidation less than worrisome.

In one sense, it’s hard to dispute that: the record business has lost half its value since the late 1990s. The monopoly these big labels once enjoyed in releasing music has also been broken, since high-quality recordings can now be made on a laptop and anyone with a Twitter feed, a Kickstarter project or access to self-service distribution platforms like TuneCore can deliver the music directly to the public.

Nor would there be much dispute that the independent music world is strong. Mr. Mills is one of the rare independent figures who is widely respected among the big shots of the corporate music world for developing a strong, influential company — with the biggest act in the world — on his own terms.

But despite all the ways that musicians can now make and distribute music by themselves, the digital economy has given the big labels a huge advantage: their content — all of it — is crucial to the success of any online service. In an age when iTunes has 20 million tracks, no new Spotify or MOG or Google Play can expect to succeed in the market without a similarly vast offering. (Never mind that plenty of those 20 million tracks might be duplicates or quickie cover versions — the number itself is an advertisement for the fulsomeness of the service.)

At the hearing, Mr. Kohl, asked directly: “In almost all industries, reducing the number of competitors from four to three expands the market power of the remaining companies and increases the risk of higher prices. Why shouldn’t these same principles apply to the music business?”

Mr. Grainge argued in the hearing that increased size would give Universal no advantage over other labels, since a record company’s strength depends on the quality of its artists’ music and it has an incentive to license as many services as possible.

“The thought that we would constrict our artists who we’ve invested in, and construct the investment we make in EMI to dissolve the market would be commercial suicide,” he said.

The opposition on the panel portrayed that attitude as disingenuous, saying that Universal’s real aim was to wrest as much control over the marketplace as possible.

Mr. Bronfman — who years ago tried to merge Warner and EMI, a fact that executives in favor of the Universal deal made sure to mention — said in written testimony that Universal “would become the troll guarding the bridge, exacting a toll on innovation.” Ms. Sohn and Mr. Bronfman also made numerous comparisons to the proposed merger of AT&T and T-Mobile USA, which would have given the combined company a market share of about 43 percent, but was opposed by the Justice Department and dropped late last year.

Since the major labels control anywhere from 70 to 90 percent of the music out there — the accounting depends on which side of an argument you are on — this means that most new digital services are paralyzed until they can first come to terms with the big labels for licenses. And those big labels often have big demands, which over the years many digital executives have called onerous; a typical deal calls for labels to receive up to 70 percent of a service’s revenue, with other restrictions over free trial periods, users’ ability to share content, and other matters. The digital graveyard is filled with dozens if not hundreds of companies that could not make their business work.

The biggest worry among most opponents of Universal’s deal isn’t that it would prevent other people from making music or getting it — somehow — to their fans. It is that when one company controls 40 percent of all songs, it can effectively call all the shots, and therefore stifle innovation.

Universal’s central challenge is to convince regulators that the Internet has leveled the market enough that its 40 percent market share won’t matter. So far its chances of success are unclear. It has come under close scrutiny from the European Commission, which this week delivered to the company a “statement of objections,” a formal list of problems to the deal, which could be a prelude to either concessions or an outright block. In the United States, the Federal Trade Commission has made no public statements about the deal, and may still take weeks or even months to make a decision.

But on Thursday one ray of light opened for Universal: New Zealand’s Commerce Commission approved the company’s acquisition of EMI.

“We continue to work with regulators in other jurisdictions,” Universal said in a response on Thursday morning, “and remain confident of other clearances.”

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